7 Possible Ways to Legally Lower Crypto Taxes

7 Possible Ways to Legally Lower Crypto Taxes

 

Many investors consider crypto to be a decent investment, but they overlook the possibility of having to pay taxes on their profits. Here's everything you should know about crypto and taxes. Crypto is a relatively new asset class that has rewarded early investors handsomely. However, once wealth is created, it is almost certain to be taxed in some form.

What is the procedure for calculating crypto taxes?

The young majority of people have shown an inclination to invest in crypto. It is largely classified as a capital asset. This implies you'll have to pay capital gains tax on it. Depending on the type of capital gain, you must pay capital gains taxes.

The two forms of capital gains are short-term and long-term, and they are determined by how long you retain the asset, in this example, it is crypto. When you sell them for more than you paid for it and keep it for a year or less, you have made a short-term capital gain. These are taxed at the same rates as regular income.

Long-term capital gains are realised when you sell crypto for more than you paid for it, but the investment must be held for more than a year. These profits are subject to lower long-term capital gains tax rates. You will be subject to a long-term capital gains tax if you hold crypto for more than a year before selling or trading it.

Long-term capital gains tax rates are different from short-term capital gains tax rates, and they can range from 0% to 20% depending on your total income. It should be mentioned that there are presently no explicit tax restrictions regulating the taxation of crypto under the Income Tax Act of 1961. If you've made crypto investments, make sure to record your profits on your tax return, as failing to do so could result in a penalty.

1.    Declare your crypto as a source of income

Taxation differs depending on whether you receive crypto in return for products and services or mine crypto. When you get crypto in certain situations, it is recognised as income. So do keep track of and report the crypto’s fair market value.

This income will be taxed as regular income when you report it. The slab is normally higher to the slab on capital gains. The amount you report as income for the crypto you received is your basis, a tax phrase that refers to the currency's initial value when you received it. You may eventually decide to sell the same at a later date. After that, you can use that basis to figure out how much capital gain you'll have to pay in capital gains taxes.

This is also true when it comes to crypto mining. Crypto mining, on the other hand, is typically regarded a self-employment activity. Mining crypto earns you taxable income, which you can report on Form 1099-NEC as self-employment income at the fair market value of the crypto on the day you received it. You must report this taxable income even if you do not receive a 1099 form.

2.    Keep your crypto for the long haul

You normally do not owe taxes on crypto until you sell it, if you are holding it as an investment and it is not making any revenue. You can completely avoid paying taxes if you don't sell any during a given tax year.

Make sure the crypto you sell has been held for more than a year to reduce your tax burden. If it has, you may be eligible for lower long-term capital gains tax rates on your crypto sale. You might save a lot of money on your tax return if you do this.

3.    Losses should be used to balance out your crypto profits

You either make a profit or a loss when you sell an investment. Which one you get depends on the asset's cost base and how much you sold it for. Capital gains and losses can be adjusted against each other. You can consciously take advantage of this to reduce the amount of tax you owe.

Gains and losses of the same sort offset each other first in terms of technicality. Short-term gains would offset short-term losses, and long-term tax items would do the same. Then you can use a net gain of the other type to offset any ensuing net loss.

Consider the following case study: a Rs. 10,000 short-term loss, a Rs. 20,000 short-term gain, a Rs. 30,000 long-term gain, and a Rs. 50,000 long-term loss. In this situation, you'd make a net short-term gain of Rs. 10,000 and a net long-term loss of Rs. 20,000. Then you'd subtract these figures to arrive at a net long-term loss of Rs. 10,000. If you have a total capital loss for the year, you can claim a portion of it and carry it over to the next year.

4.    Sell your assets during a low-income year

Whether you have short-term or long-term capital gains, the tax rate you pay is determined by your income. Your tax rate will be reduced if your taxable income is low. You may be able to save money on taxes by selling crypto that you anticipate will appreciate in years when you will be paying taxes at a lower rate.

5.    Make a charitable donation

If you list your deductions, donations to a qualifying charity may be tax-deductible. Before giving an asset, you must have owned it for at least one year. Donating property, such as crypto, may be eligible for tax benefits. You may usually deduct the fair market value of your crypto from your taxes, but you won't have to pay capital gains taxes. The amount of the deduction could be limited, so talk to your tax advisor about how a donation could help you save money on taxes.

6.    Give gifts to your loved ones

Giving crypto as a gift could help you avoid paying taxes on your gains. The recipient of the crypto will need to know your crypto basis in order to figure out how much tax they owe when they sell it. They will have to pay tax on the entire gain over your base, although it may be less than you would have paid if you had paid it yourself.

For example, a successful adult in their fifties is likely to be in a higher tax rate than a new college graduate starting their first job. Give your crypto to a younger family member, and your overall tax liability on that currency may be reduced.

7.    Keep it until you pass away

If you don't require access to the money you've put into your crypto, you might utilise it to develop generational wealth. You must trust in the long-term worth of crypto to take advantage of this strategy to effectively reduce the incidence of tax. Make sure to consult with your tax advisor to properly plan for this type of inheritance.

If you buy crypto assets before they skyrocket in value, you might be able to make a lot of money. If you're fortunate enough to have this happen to you, a little tax planning could help you lower the amount of money you owe in taxes on your crypto gains. When dealing with a tax professional, the list of suggestions above may be useful.